(Bloomberg) -- Lending to UK commercial real estate dropped by a third last year to the lowest in a decade as deal volumes tumbled and banks turned cautious. 

The £32 billion ($40 billion) of new lending was the lowest figure recorded since 2013, according to a report based on a survey of lenders by Bayes Business School. The volume of problem loans is also mounting as real estate values fall, with smaller lenders most exposed to valuation and interest cover breaches, the data published Thursday showed.

Rising interest rates opened a wide gap between buyers and sellers price expectations as bidders demanded better returns in the face of higher borrowing costs. That caused transaction volumes to plummet and values to slowly correct, increasing the relative indebtedness of some borrowers and posing a risk to their lenders.

It “was a year when lenders sought to prioritize the identification of the nature and scale of their problem loans over new loans origination,” said Chris Gow, CBRE Group Inc.’s head of finance and structured debt. “Some lenders are more assertively protecting their positions on defaulted loans.”

While banks and other lenders have grown more cautious, reducing the amount they will extend on new loans, falling valuations have pushed up borrowers’ relative indebtedness on older facilities. Average loan-to-value ratios — the size of a loan relative to a building’s valuation — continued to rise last year, particularly for smaller lenders like specialist credit funds. More than half of the loans held by smaller lenders had LTVs in excess of 60%, compared to just 14% for UK banks. 

Overall, 9% of UK commercial property loans had an LTV in excess of 70%, up from a low of 6.7% in 2021. Still, that’s well below the levels reported in the aftermath of the financial crisis.  

So called interest coverage ratios, a measure of the extent to which the rent generated by a building can cover interest costs, have also been under pressure. Smaller lenders reported that 30% of their loans had ICR ratios of below 1.4 times, an uncomfortably thin margin and a sign that interest costs have risen faster than rents for some borrowers. About 75% of large lenders’ loans had coverage ratios of more than two times. 

The composition of UK commercial real estate debt markets has also shifted. International banks accounted for 22% of new lending, down from 27% a year earlier and as much as 40% over the past six years. German banks’ market share has fallen to 6% of new lending, the lowest since the survey began in 1999. 

“The pullback by international banks is one to watch,” Commercial Real Estate Finance Council Chief Executive Officer Peter Cosmetatos said. “Regulatory and commercial challenges in their home jurisdictions may be more decisive for many of them than the state of the UK market.”

The Bayes research is based on a survey of lenders to which 37 banks and building societies, 11 insurers and 34 other credit providers responded. 

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